Economics: A Historical Perspective (Encyclopedia of Business and Finance)
Economics has been around since the beginning of time, but the study of economics dates back only a few hundred years. Since the beginning of human history, people have had to confront the problem of scarce resources and unlimited wants. The study of economics will continue until the end of time because each day uncovers new evidence that supports or revolutionizes economic theory.
THE DEVELOPMENT OF ECONOMIC SYSTEMS
The United States has a capitalistic economic system. Sometimes this system is called the free-enterprise system because that term is more acceptable to certain individuals. A capitalistic system includes a market society, or market system system of mercantilism in which participants react freely to the opportunities and challenges of the marketplace. This is in contrast to systems in which participants follow tradition or the commands of others. In a market system, anyone can buy land or sell it of his or her own free will or produce products and/or services that are sold at a market price. In earlier societies, participants responded not to the demands of the marketplace but to the demands of tradition or law as well as the threat and fear of punishment.
The factors of production, key to a capitalistic system, are the result of historical changes that made labor a key to creating wealth, made real estate out of land that had been in families for generations, and made capital out of possessions. Capitalism, a free-market system, was the cause of much unrest and insecurity, but it also gave birth to progress and, ultimately, fulfillment. There have been several key individuals whose work and economic writing help to clarify current thought about economic systems. The ideas of four are presented here.
ADAM SMITH (1723790)
Perhaps the best known and one of the most revered economists, Adam Smith wrote The Wealth of Nations in 1776, the same year the Declaration of Independence was signed. In this famous work, Smith explained how an independent society works. He answered several questions that people had at the time regarding the concepts of a free-market system.
Of primary concern was the question of how those consumed with greed might be controlled so they wouldn't take over society. Smith introduced the concept of competition. Anyone bent on bettering only him- or herself with no regard for others will be confronted by others with the same goals. In this new system, those who are buying or selling are forced to meet the prices offered by competitors.
Smith also illustrated that a market system also has another important function. That function is to produce goods and services that society wants, and in quantities that society wants. A good example of this is when products such as hula-hoops, cabbage patch dolls, or beanie babies became the rage, there weren't enough being produced to satisfy all the potential buyers. As a result, the manufacturers had to increase production and were also able to increase prices because the demand for the products was so great and buyers were willing to pay higher prices. In fact, many buyers bought quantities they didn't need precisely so they could, in turn, sell the high-demand products to others who were willing to pay the higher price. That is the capitalistic market system.
Smith was extremely visionary and foresaw that if a free market is to grow and prosper, there must be little government intervention. He saw that a free market must be self-regulating in order to become wealthy and robust. He made it clear that it was truly individuals' greed and desire for profits that would create a working free-enterprise system that is self-regulating.
KARL MARX (1818883)
The mere mention of Karl Marx might be disturbing to some; however, his thoughts and writings on economics have stirred many to more intense economic analysis. His role in economic history is quite different from that of Adam Smith. Smith was the visionary regarding the orderly processes and growth of capitalism while Marx diagnosed its disorderliness and eventual demise. Marx believed that growth is fraught with crises and pitfalls.
Marx was the first economic theorist to stress the instability of capitalism, maintaining that economic growth is wavering and uncertain. He pointed out that even though accumulation of wealth is primary in a free-market system, it may not always be possible. Marx believed that increasing instability would occur until the system collapsed.
Marx discussed how the size of businesses would continue to grow because of the inherent instability and demise of smaller, noncompetitive businesses. Failing businesses would be bought by successful ones; hence, the growth cycle would continue. He realized that a trend toward larger businesses is typical in a capitalistic system.
Marx also speculated that there would be a class struggle in a capitalistic society. He thought that as small businesses were forced out of the marketplace and acquired by larger businesses, the social structure would also evolve into two classes. He predicted that there would be one class of wealthy property owners and another class of property less workers. There are arguments for and against Marx's economic beliefs, but he has more critics than supporters in capitalistic countries.
JOHN MAYNARD KEYNES (1883946)
John Maynard Keynes was the father of a "mixed economy" in which the government plays a crucial role. Many believe that government should not have a role in a capitalistic system, viewing such a role with considerable distrust and suspicion. As a result, many find Keynes's theories to be as offensive as those of Marx.
One of the main tenets of Keynes's theoryn conflict with both Smith and Marxs that economic problems in a capitalistic society are not self-correcting and that economies cannot keep growing indefinitely. He believed that if there is nothing to support capital growth, a depressed economy requires outside intervention or a substitute for business capital spending. Keynes believed that only government intervention could get a country out of a depression and the economy back on track.
ALFRED MARSHALL (1842924)
Alfred Marshall was a mathematician who applied his mathematical training to his explanation of economics. Marshall's economic theories, although very elaborate, have been viewed as eclectic and lacking in internal consistency. He was noted for taking a series of formal economic thoughts and analyses and linking them. He thought that his writings would present a detailed picture of economic reality.
His complex thoughts are much too detailed to go into here, but he did develop theories of value and distribution that combine marginal utility with real cost. The forces behind both supply and demand determine value. Behind demand is marginal utility, which is reflected in the prices at which given quantities will be demanded by buyers. Marshall stated that behind supply is marginal effort and sacrifice, reflected in the prices at which given quantities will be produced.
There are, of course, many other noted economists who have influenced the study of economics. Many contemporary economic theorists have used the writings of the early economists to further develop economic thought. Economics is a continually evolving study, and its history will be constantly changing.
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Rostow, W. W. (1990). Theorists of Economic Growth from David Hume to the Present With a Perspective on the Next Century. New York: Oxford University Press.